Here are 19 “mental tools” that I find useful for #Investing (and life in general).
⌚You can apply them at any time.
🧩The order is random.
🔧Which tools make the most sense for you depends on the given circumstances.
Let’s dive in!
⌚You can apply them at any time.
🧩The order is random.
🔧Which tools make the most sense for you depends on the given circumstances.
Let’s dive in!
1. Information Gathering
When making decisions, always source your data from different places. Include conflicting information and contrary opinions to get a more complete picture. And always assume that you don't know the full story.
When making decisions, always source your data from different places. Include conflicting information and contrary opinions to get a more complete picture. And always assume that you don't know the full story.
2. Circle of Competence
Know which things you know and know which things you do not know. This way you know where you have an advantage and where you are at a disadvantage and should improve. Understanding your circle of competence improves decision-making and outcomes.
Know which things you know and know which things you do not know. This way you know where you have an advantage and where you are at a disadvantage and should improve. Understanding your circle of competence improves decision-making and outcomes.
3. Second-Order Thinking
Not only consider your actions and their immediate consequences, but the subsequent effects of those actions as well. Think in terms of interactions, time, and system dynamics. What are the key variables and how do they interact?
Not only consider your actions and their immediate consequences, but the subsequent effects of those actions as well. Think in terms of interactions, time, and system dynamics. What are the key variables and how do they interact?
4. Occam’s Razor
Simpler explanations are more likely to be true than complicated ones. However, don't use Occam’s razor in place of logic. Your judgment must be backed by empirical evidence, not just its simplicity.
Simpler explanations are more likely to be true than complicated ones. However, don't use Occam’s razor in place of logic. Your judgment must be backed by empirical evidence, not just its simplicity.
5. Hanlon’s Razor
Do not attribute to malice that is easily explained by stupidity or incompetence. People make mistakes. Ask yourself if there is another reasonable explanation for the events that have occurred.
Do not attribute to malice that is easily explained by stupidity or incompetence. People make mistakes. Ask yourself if there is another reasonable explanation for the events that have occurred.
6. Randomness
A lot of things happen randomly. Do not attribute causality to things that are actually outside of human control. However, know that by putting in hard work (f.e. thorough preparation) you can reduce the probability of random events happening.
A lot of things happen randomly. Do not attribute causality to things that are actually outside of human control. However, know that by putting in hard work (f.e. thorough preparation) you can reduce the probability of random events happening.
7. Don’t Predict Single Variables
Often, it is impossible to predict individual variables (f.e. at what time a market crash will occur). But often you can predict the direction in which many interrelated variables will develop (f.e. the market’s macro trend for the coming years)
Often, it is impossible to predict individual variables (f.e. at what time a market crash will occur). But often you can predict the direction in which many interrelated variables will develop (f.e. the market’s macro trend for the coming years)
8. The Power Of Compounding
Compounding is the process of adding interest to a fixed sum. Understand that it is an exponential effect. Know that not only money compounds but f.e. also ideas and relationships.
Compounding is the process of adding interest to a fixed sum. Understand that it is an exponential effect. Know that not only money compounds but f.e. also ideas and relationships.
9. Multiplying By Zero
In some cases, a single critical mistake or deficiency can cause the whole system to collapse. 1000 x 0 = 0. Focus on fixing the 0 instead of optimizing or enlarging other areas.
In some cases, a single critical mistake or deficiency can cause the whole system to collapse. 1000 x 0 = 0. Focus on fixing the 0 instead of optimizing or enlarging other areas.
10. Bell Curve/Normal Distribution
The normal distribution is a statistical process that is visualized as a bell curve, with a prominent central average and increasingly rare standard deviations from that average. Know which systems follow this model and which do not.
The normal distribution is a statistical process that is visualized as a bell curve, with a prominent central average and increasingly rare standard deviations from that average. Know which systems follow this model and which do not.
11. Fat-Tailed Processes
Some processes look like a normal distribution but have a fat tail – meaning that seemingly outlier events are far more likely. Understand that a fat tail on the negative side makes processes riskier, or more profitable if on the positive side.
Some processes look like a normal distribution but have a fat tail – meaning that seemingly outlier events are far more likely. Understand that a fat tail on the negative side makes processes riskier, or more profitable if on the positive side.
12. Pareto Principle
The Pareto principle, or the 80 to 20 rule, states that 80% of the results are achieved with 20% of the total effort. The remaining 20% of the results require the most quantitative work with 80% of the total effort.
The Pareto principle, or the 80 to 20 rule, states that 80% of the results are achieved with 20% of the total effort. The remaining 20% of the results require the most quantitative work with 80% of the total effort.
13. Law of Diminishing Returns
After some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. Think of better ways of using your resources.
After some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. Think of better ways of using your resources.
14. Network Effects
A network tends to become more valuable as nodes are added to the network: this is known as the network effect. It is widespread in the modern world (f.e. Cryptos, social media networks) and creates immense value for organizations and customers alike.
A network tends to become more valuable as nodes are added to the network: this is known as the network effect. It is widespread in the modern world (f.e. Cryptos, social media networks) and creates immense value for organizations and customers alike.
15. Gresham’s Law
Bad behavior drives out good behavior in a deteriorating moral system, or bad practices drive out good practices in a deteriorating economic system. Generally, regulation and oversight are required to prevent results that follow Gresham’s Law.
Bad behavior drives out good behavior in a deteriorating moral system, or bad practices drive out good practices in a deteriorating economic system. Generally, regulation and oversight are required to prevent results that follow Gresham’s Law.
16. Backup Systems
Backups are a critical part of systems. Without them, systems tend to fail over time. However, in certain cases, the added benefits of redundancy are outweighed by the risks of added complexity.
Backups are a critical part of systems. Without them, systems tend to fail over time. However, in certain cases, the added benefits of redundancy are outweighed by the risks of added complexity.
17. Black Swan
A black swan is an unlikely event with a significant impact that is invisible to an observer ahead of time. To address a black swan do not focus on better methods of prediction. Instead, make systems more robust or anti-fragile.
A black swan is an unlikely event with a significant impact that is invisible to an observer ahead of time. To address a black swan do not focus on better methods of prediction. Instead, make systems more robust or anti-fragile.
18. Remove Bad Elements
To improve a situation or a system, remove bad elements instead of adding good elements.
To improve a situation or a system, remove bad elements instead of adding good elements.
19. Open-Mindedness
Be open to new ideas, technologies and systems. Getting involved in new things costs energy, time and often poses a risk. But sometimes the gains can more than outweigh all of that.
Be open to new ideas, technologies and systems. Getting involved in new things costs energy, time and often poses a risk. But sometimes the gains can more than outweigh all of that.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
